Transferring property to a limited company is an increasingly popular strategy for landlords looking to benefit from tax efficiencies. However, this process often triggers Stamp Duty Land Tax (SDLT) and Capital Gains Tax (CGT) liabilities, which can make the transfer costly.
With the recent increase in the SDLT surcharge on additional properties to 5%, property investors face higher tax obligations when transferring property to a limited company.
That said, certain reliefs, such as Incorporation Relief, may help mitigate these costs if your property business meets specific criteria. This guide explores these options and why consulting a tax expert is essential.
What Is the 5% SDLT Surcharge?
In October 2024, the SDLT surcharge for additional residential properties, including those transferred to a limited company, increased from 3% to 5%.
How It Works:
SDLT is calculated based on the market value of the property at the time of transfer.
For residential properties, an additional 5% surcharge applies to the standard SDLT rates.
Example:
Market Value: £300,000
Standard SDLT: £5,000
5% Surcharge: £15,000
Total SDLT Due: £20,000
Are There Ways to Avoid SDLT on Property Transfers?
1. Incorporation Relief
Incorporation Relief can help landlords defer CGT liabilities when transferring property to a limited company. In some cases, it can also provide relief from SDLT if specific criteria are met.
Key Conditions:
The property business must be a legitimate trading activity that generates income from profits (e.g., rental income).
You must be actively involved in managing the business, including tasks like:
- Rent collection.
- Tenant management.
- Property maintenance.
Important: The business must operate as a going concern, with multiple properties often being a key factor in qualifying for relief.
2. Partnership Relief
If the property is owned by a partnership and transferred to a limited company, Partnership Relief may apply.
Key Conditions:
- The partnership must be an established and genuine business.
- All partners must actively participate in managing the properties.
Example:
A group of family members operates a partnership managing five rental properties. When transferring these properties to a limited company, they qualify for SDLT relief under Partnership Relief rules.
Challenges Without Relief
Example Without Relief:
Scenario: A landlord owns a single buy-to-let property valued at £250,000 and transfers it to a limited company.
Liabilities:
- SDLT: £10,000 (including the 5% surcharge).
- CGT: Taxable gain based on the difference between the property’s market value and its original purchase price.
Result: Without relief, the combined tax liabilities can significantly increase the cost of the transfer
Why Transferring Property to a Limited Company May Still Be Worthwhile
Despite the upfront costs, transferring property to a limited company offers long-term financial benefits:
1. Tax Efficiency
2. Portfolio Growth
3. Inheritance Planning
Example Scenarios
Scenario 1: Qualifying for Incorporation Relief
Situation: A landlord actively manages a portfolio of six rental properties, generating £60,000 in annual profits.
Action: The landlord transfers the properties to a limited company as a going concern.
Result: The transfer qualifies for Incorporation Relief, eliminating both SDLT and CGT liabilities.
Scenario 2: Partnership Relief
Situation: A husband and wife operate a property partnership, managing four buy-to-let properties worth £800,000.
Action: They transfer the properties to a newly formed limited company.
Result: Partnership Relief exempts the transaction from SDLT, reducing the cost of the transfer.
Why You Need Expert Advice
Navigating tax reliefs and exemptions requires professional guidance. A tax expert can:
- Assess whether your property business qualifies for relief.
- Advise on structuring your portfolio to minimise tax liabilities.
- Ensure compliance with SDLT regulations.
Important: Auction Finance provides mortgage advice but is not authorised to offer tax advice. Always consult a qualified tax professional before making decisions about property transfers.
